Process costing of amul ice creams

overview

Amul Ice Cream was launched on 10th March, 1996 in Gujarat. The portfolio consisted of impulse
products like sticks, cones, cups as well as take home packs and institutional/catering packs. Amul ice
cream was launched on the platform of ‘Real Milk. Real Ice Cream’ given that it is a milk company and the
wholesomeness of its products gives it a competitive advantage.

In 1997, Amul ice creams entered Mumbai followed by Chennai in 1998 and Kolkata and Delhi in
2002. Nationally it was rolled out across the country in 1999.

It has combated competition like Walls, Mother Dairy and achieved the No 1 position in the country. This
position was achieved in 2001 and it has continued to remain at the top.

Today the market share of Amul ice cream is 38% share against the 9% market share of HLL, thus making
it 4 times larger than its closest competitor.

Not only has it grown at a phenomenal rate but has added a vast variety of flavours to its ever growing
range. Currently it offers a selection of 220 products. Amul has always brought newness in its products and
the same applies for ice creams.

In January 2007, Amul introduced SUGAR FREE & ProLife Probiotic Wellness Ice Cream, which
was a first in India. This range of SUGAR FREE, LOW FAT Diabetic Delight & ProLife Probiotic Wellness Ice
Cream is created for the health conscious.

Amul’s entry into ice creams is regarded as successful due to the large market share it was able to capture
within a short period of time – due to price differential, quality of products and of course the brand name.

Present Status of Amul Ice Cream

In a short span of 6 years Amul Ice Cream has become the No.1 ice cream brand in the country. It is now
the only national brand and all other ice cream brands are regional.

Amul Ice Cream has achieved 38% share against 9% market share of HLL making it 4 times larger than its
closest competitor.

What is process costing??

Process costing is an accounting methodology that traces and accumulates direct costs, and
allocates indirect costs of a manufacturing process. Costs are assigned to products, usually in a
large batch, which might include an entire month's production. Eventually, costs have to be allocated
to individual units of product. It assigns average costs to each unit, and is the opposite extreme
of Job costing which attempts to measure individual costs of production of each unit. Process
costing is usually a significant chapter. it is a method of assigning costs to units of production in
companies producing large quantities of homogeneous products.

Process costing is a type of operation costing which is used to ascertain the cost of a product at
each process or stage of manufacture. CIMA defines process costing as "The costing method
applicable where goods or services result from a sequence of continuous or repetitive operations or
processes. Costs are averaged over the units produced during the period". Process costing is
suitable for industries producing homogeneous products and where production is a continuous flow.
A process can be referred to as the sub-unit of an organization specifically defined for cost collection
purpose.

The importance of process costing

Costing is an important process that many companies engage in to keep track of where their money
is being spent in the production and distribution processes. Understanding these costs is the first
step in being able to control them. It is very important that a company chooses the appropriate type
of costing system for their product type and industry. One type of costing system that is used in
certain industries is process costing that varies from other types of costing (such as job costing) in
some ways. In process costing unit costs are more like averages, the process-costing system
requires less bookkeeping than does a job-order costing system. Thus, some companies often
prefer to use the process-costing system.
When process costing is applied?

Process costing is appropriate for companies that produce a continuous mass of like units through
series of operations or process. Also, when one order does not affect the production process and a
standardization of the process and product exists. However, if there are significant differences
among the costs of various products, a process costing system would not provide adequate product-
cost information. Costing is generally used in such industries such as petroleum, coal mining,
chemicals, textiles, paper, plastic, glass, and food.

Reasons for use

Companies need to allocate total product costs to units of product for the following reasons:

 A company may manufacture thousands or millions of units of product in a given period of time.
 Products are manufactured in large quantities, but products may be sold in small quantities,
sometimes one at a time (automobiles, loaves of bread), a dozen or two at a time (eggs,
cookies), etc.
 Product costs must be transferred from Finished Goods to Cost of Goods Sold as sales are
made. This requires a correct and accurate accounting of product costs per unit, to have a
proper matching of product costs against related sales revenue.
 Managers need to maintain cost control over the manufacturing process. Process costing
provides managers with feedback that can be used to compare similar product costs from one
month to the next, keeping costs in line with projected manufacturing budgets.
 A fraction-of-a-cent cost change can represent a large dollar change in overall profitability, when
selling millions of units of product a month. Managers must carefully watch per unit costs on a
daily basis through the production process, while at the same time dealing with materials and
output in huge quantities.
 Materials part way through a process (e.g. chemicals) might need to be given a value, process
costing allows for this. By determining what cost the part processed material has incurred such
as labor or overhead an "equivalent unit" relative to the value of a finished process can be
calculated.
Types of Process Costing

There are three types of process costing, which are:

1. Weighted average costs. This version assumes that all costs, whether from a preceding period
or the current one, are lumped together and assigned to produced units. It is the simplest
version to calculate.

2. Standard costs. This version is based on standard costs. Its calculation is similar to weighted
average costing, but standard costs are assigned to production units, rather than actual costs;
after total costs are accumulated based on standard costs, these totals are compared to actual
accumulated costs, and the difference is charged to a variance account.

3. First-in first-out costing (FIFO). FIFO is a more complex calculation that creates layers of costs,
one for any units of production that were started in the previous production period but not
completed, and another layer for any production that is started in the current period.

There is no last in, first out (LIFO) costing method used in process costing, since the underlying
assumption of process costing is that the first unit produced is, in fact, the first unit used, which is the
FIFO concept.

Why have three different cost calculation methods for process costing, and why use one version instead
of another? The different calculations are required for different cost accounting needs. The weighted
average method is used in situations where there is no standard costing system, or where the
fluctuations in costs from period to period are so slight that the management team has no need for the
slight improvement in costing accuracy that can be obtained with the FIFO costing
method. Alternatively, process costing that is based on standard costs is required for costing systems
that use standard costs. It is also useful in situations where companies manufacture such a broad mix of
products that they have difficulty accurately assigning actual costs to each type of product; under the
other process costing methodologies, which both use actual costs, there is a strong chance that costs for
different products will become mixed together. Finally, FIFO costing is used when there are ongoing and
significant changes in product costs from period to period – to such an extent that the management
team needs to know the new costing levels so that it can re-price products appropriately, determine if
there are internal costing problems requiring resolution, or perhaps to change manager performance-
based compensation. In general, the simplest costing approach is the weighted average method, with
FIFO costing being the most difficult.
Bibliography

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